Sowing the seed

Sowing the seed

As one business funding source replaces another, Peter Baber talks to those most closely involved about where support is most needed.

It’s public funding, Jim, but not as we know it. At the end of last month the new £90m fund that will be largely responsible for doling out public money to growing Yorkshire businesses moved into new offices just next to Business Link Yorkshire, an organisation which has itself only recently gone through a massive restructuring.

From a building in a business park still getting used to its soft landscaping, Finance Yorkshire will be doling out the cash, potentially to the very same people who may be coming through the doors at Business Link.

In fact, Finance Yorkshire’s chairman James Newman says the location is partly intentional because he wants the new organisation to work with Business Link and other regional business support organisations much more closely than its forebears may have done in the past.

“We have learned lots of issues this time around,” says Newman, a veteran on the Yorkshire business scene who is currently a non-executive director on two AIM-listed companies, Straight and Brulines, and has just stepped down from the board of Infoserve.

“We are located above Business Link and have strong connections with Connect Yorkshire. We will try to be a lot more conversant with Yorkshire Association of Business Angels (YABA). We will do more co-funding, and could be involved in bigger deals than we have been before.” It all sounds very promising.

The fund is being provided in part by Yorkshire Forward and in part by the European Investment Bank (EIB) and the European Regional Development Fund (ERDF).

The changes have come about partly because of a change in way the EU looks at business funding, and also because the old-style funds operating in Yorkshire have now reached the end of their investment period, although both still have three years to go as portfolio funds before they are wound up completely.

The £90m is actually being split into three different new funds, managed by three different fund managers. A Seedcorn Finance Fund, able to grant amounts of between £15,000 and £780,000 is managed by Enterprise Ventures. There’s an Equity Linked Finance Fund for investments of between £100,000 and £2m, managed by North Star Equity, and finally a Loans Fund for amounts of between £15,000 and £150,000. This last is managed by an organisation called FSY which may be new but it is in fact made up of staff from the old South Yorkshire Investment Fund (SYIF), led by Tony Goulbourn, which Finance Yorkshire has effectively replaced.

Of course, using public money to finance private sector businesses will always be a slightly contentious issue. It’s no wonder that those still in charge of the old funds are keen to tell you just how much of the public money has been paid back (see panel), or that those behind the new venture quickly go on the defensive. Both Newman and Goulbourn are quick to insist business growth, not aid, is what the issue is here.

“We are not providing cash for survival,” says Newman. Goulbourn goes further. “The key thing is that when we make judgements about who we lend to we still have to do so on sound commercial principles,” he says, “and I don’t care if that makes me sound like a typical fund manager. We are not there to try to prop up businesses that are failing, so you need to work out what to avoid.” So what changes can business hoping to get funding expect? The most obvious change is that the new fund covers the whole of Yorkshire and North Lincolnshire – essentially the whole area covered by Yorkshire Forward.

The two funds Finance Yorkshire is replacing – SYIF and Partnership Investment Finance (PIF) – had a much more complicated geography. SYIF was a fund covering the old Objective 1 area in Yorkshire, which meant South Yorkshire only. PIF was covering Objective 2 areas, which were less easy to define. Some parts of the region were covered, others were not. It was a dicey situation if, for example, you happened to be a business located in the West Yorkshire village of Outlane.

Parts of it are in Kirklees which was in the Objective 2 area and so would qualify, but other parts are in Calderdale, which is not and would not. And if you were choosing to locate further north in Yorkshire, it might have been wise to choose Thirsk, which was just in the Objective 2 area, rather than neighbouring Northallerton, which was just out of it. Such idiosyncrasies have been ironed out in the new-look fund, although Goulbourn isn’t sure that’s necessarily all good news.

The two old funds together, he says, amounted to £87m (£50m for SYIF and £37m for PIF). The new fund is worth only £3m more.

He says: “In a sense we are more limited even more in terms of geography. Jonathan Dixon, Finance Yorkshire’s acting chief executive, is more diplomatic, pointing out that in initial talks with the EU, a sum of £120m had been mooted, which was subsequently whittled down.

“We would love to have had more,” he says, “but a report PricewaterhouseCoopers wrote for us suggested £90m is by no means bad.” Other idiosyncrasies that are staying are the sectors Finance Yorkshire is not allowed to invest in. Just as under the old system, these include retail, construction, and any other industries that already have specific Government support such as agriculture, coal and steel. Investments are also barred to companies involved in tobacco, alcohol and negative medical effects.

Some of those may seem surprising, particularly the bar on retail. Goulbourn says: “The idea was that by offering support to retailer A you were putting off retailer B.” You could say that might apply to any business. But he says in any case these barriers were sometimes possible to work around – a fact that becomes clear when you discover that one of PIF’s investee companies was Leeds Brewery, an alcohol supplier which owns two pubs in Leeds, although the investment only covered the brewery part of the business. Another new part of the deal is the Seedcorn Fund.

Goulbourn has long been actively campaigning for such a fund to exist in Yorkshire, as they have already existed in other parts of the north for many years.

He actually had one set up, also managed by Enterprise Ventures, under the auspices of SYIF. But this new fund is of a much bigger order. Jonathan Diggines, managing director of Enterprise Ventures, says Yorkshire businesses probably still have to get used to the idea of a fund for companies that have yet to exist.

“It’s not like the Merseyside Investment Fund,” he says, “which has been running for years and which SYIF to a certain extent was modelled on.” The fund should be easier to apply to than before, he says, because whereas in days past anyone applying for other seedcorn funds would usually need to have match funding from somewhere else, this fund is “prematched”.

Because the European Investment Bank raises its funds on the capital markets, it is classed as a private sector investor, even if it is underwritten by national governments.

So, the need for there to be public and private funding for a new venture is met. All you need, he says, is a business plan, and it doesn’t even need to be complete. But he says the reasons why Yorkshire needs such a fund are all too clear.

“The most important thing is that it should be something that is patentable in IP terms,” says Diggines. “The rest we can work on.” He says he still prefers “rifle shot” approach of only picking certain winners to the “spray and pray” policy many early seedcorn funds adopted where they would essentially give money to anything.

But he believes the need for such a fund at the moment is overwhelming. “If you look at BVCA statistics on the returns in the early years private sector funds who do start-ups are getting,” he says, “you can see why so few people are doing them. And yet the banks are currently only interested in doing bigger buyouts. In Yorkshire we do not really have an investor culture, but we need one. These funds are vital not just because of the companies we are investing in, but also for the culture we need to encourage.” A similar thought is echoed by Newman.

“Finance Yorkshire is even more important now in the current situation,” he says. “Banks are far more choosy about who they lend to, and we have to plug that gap.” So is the course set and the weather fair? Well, not quite. The fund managers may have been appointed and the offices filled, but so far no money has been passed on to anyone. Why not? Because Finance Yorkshire hasn’t officially launched yet; the signature is still needed before the £90m is released.

Goulbourn and Diggines say this is becoming an issue because they have deals waiting. “We have £1m already waiting to be signed off,” says Goulbourn, “and businesses cannot wait.” Dixon admits he was expecting the agreement to have been signed off by now, but says the election and change of government has put another hurdle in what have already been protracted negotiations about future funding. The negotiations took so long, in fact, that Yorkshire Forward had to step in to provide PIF and SYIF with an extra £5m each to tide them over when their official term of operation ended before agreement was reached. He insists that the new ministers are only looking over the agreement again – something he says they are right to do – and that there is no chance they would suddenly scrap the whole scheme.

“We are encouraged by comments made recently by Mark Prisk, the minister for small business in favour of a similar fund in the North West,” he says. “We have shown these comments to the EIB, and they are reassured.” He is confident the scheme will be given the go-ahead in July. One side issue of the delay, however, is that he can carry on acting. Until the deal is signed, Finance Yorkshire will not have a permanent chief executive.